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From Securities Regulation Daily, April 12, 2017

Cotenant claims against Madoff fail for lack of customer status

By Rebecca Kahn, J.D.

Claims to recover amounts in Madoff accounts were properly denied because the claimants, as cotenants, did not qualify as "customers" under the Securities Investor Protection Act (SIPA) and were barred from participating in the distribution of customer property. Therefore, the Southern District of New York bankruptcy court upheld the trustee’s denial of cotenant claims (Securities Investor Protection Corp. v. Madoff, April 7, 2017, Bernstein, Stuart M.).

Madoff scheme and claim procedures. The infamous Ponzi scheme was operated from the investment advisory side of Bernard L. Madoff Investment Securities LLC (BLMIS). In 2008, Bernie Madoff was arrested and charged with securities fraud and the SEC filed a civil complaint against Madoff and BLMIS. At the request of Securities Investor Protection Corporation (SIPC) BLMIS customers were granted SIPA protection and a trustee was appointed to liquidate BLMIS. The case was removed to bankruptcy court and after Madoff pleaded guilty, procedures were established for former customers to file claims against the BLMIS estate.

Claims denied. In this proceeding, the trustee sought a ruling on his denial of customer claims filed by the Robert & Rebecca Epstein Living Trust and Daniel C. Epstein and Keith & Jeffrey Schaffer and Carla Hirschhorn (Schaffer/Hirschhorn Cotenants).

Kaufman tenancy in common. Dr. Judy Kaufman opened an account with BLMIS in 1993 and later added her children to the account, with each member holding an interest as a tenant in common. In 2003 and 2008 Kaufman added the Epstein Living Trust and Daniel Epstein (Epsteins) respectively as cotenants.

Under SIPC Rule 105, an account held by tenants in common is treated as a single customer, entitled to a single customer claim. Undisputedly, the account was a Rule 105 qualifying joint account. Consequently, the Kaufman Tenancy in Common (TIC) was the only customer for this account.

Epsteins were not "customers." The Epsteins failed to satisfy the "critical aspect" of the customer definition—the entrustment of cash or securities to BLMIS for the purpose of trading securities. Specifically, Epstein discovery responses revealed (1) no BLMIS accounts in their own names; (2) no direct communications with BLMIS; (3) that their claims were based on investments in the Kaufman TIC account; (3) that they never received account statements or tax documents from BLMIS; (4) that they never entered into contracts with BLMIS; (5) that their only relationship with BLMIS existed by way of their relationship to the Kaufman TIC; and (6) that they lacked control, investment discretion, or decision-making power regarding their BLMIS investment. While the Kaufman TIC was a "customer" of BLMIS, entitled to a customer claim, the Epsteins were not.

While the trustee acknowledged Epstein checks payable to BLMIS, the checks had been deposited into the Kaufman TIC account. Moreover, the Epsteins admitted in discovery that they sent their checks to Kaufman, not directly to BLMIS. The Epsteins alluded to, but failed to produce, a letter requesting BLMIS to send them separate customer statements. The court ruled that the trustee properly disallowed the claims because the Epsteins were not "customers" of BLMIS.

Schaffer/Hirschhorn cotenants. For the same reason, the bankruptcy court upheld the denial of the Schaffer/Hirschhorn claims. Each cotenant filed a claim for his share of a tenancy in common account with BLMIS. While the Schaffer/Hirschhorn tenancy in common was the account holder and "customer," the Schaffer/Hirschhorn cotenants were not.

The case is Adv. P. No. 08-01789.

Attorneys: Kevin H. Bell for the Securities Investor Protection Corp.

Companies: Securities Investor Protection Corp.; Bernard L. Madoff Investment Securities, LLC

MainStory: TopStory FraudManipulation InvestmentAdvisers NewYorkNews

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